Here's Why Sugi HoldingsLtd (TSE:7649) Can Manage Its Debt Responsibly

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, Sugi Holdings Co.,Ltd. (TSE:7649) does carry debt. But is this debt a concern to shareholders?

We check all companies for important risks. See what we found for Sugi HoldingsLtd in our free report.

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is Sugi HoldingsLtd's Debt?

You can click the graphic below for the historical numbers, but it shows that as of February 2025 Sugi HoldingsLtd had JP¥45.4b of debt, an increase on JP¥837.0m, over one year. But on the other hand it also has JP¥52.8b in cash, leading to a JP¥7.44b net cash position.

How Healthy Is Sugi HoldingsLtd's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Sugi HoldingsLtd had liabilities of JP¥216.1b due within 12 months and liabilities of JP¥28.3b due beyond that. Offsetting this, it had JP¥52.8b in cash and JP¥70.7b in receivables that were due within 12 months. So its liabilities total JP¥121.0b more than the combination of its cash and short-term receivables.

This deficit isn't so bad because Sugi HoldingsLtd is worth JP¥558.3b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. While it does have liabilities worth noting, Sugi HoldingsLtd also has more cash than debt, so we're pretty confident it can manage its debt safely.

See our latest analysis for Sugi HoldingsLtd

And we also note warmly that Sugi HoldingsLtd grew its EBIT by 16% last year, making its debt load easier to handle. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Sugi HoldingsLtd can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Sugi HoldingsLtd may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Looking at the most recent three years, Sugi HoldingsLtd recorded free cash flow of 31% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While Sugi HoldingsLtd does have more liabilities than liquid assets, it also has net cash of JP¥7.44b. And we liked the look of last year's 16% year-on-year EBIT growth. So we are not troubled with Sugi HoldingsLtd's debt use. Over time, share prices tend to follow earnings per share, so if you're interested in Sugi HoldingsLtd, you may well want to click here to check an interactive graph of its earnings per share history.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.